A Characterization of the Daily and Intraday Behavior of Returns on Options

ABSTRACT

The daily and intraday behavior of returns on Chicago Board Options Exchange options is examined. Option returns contain systematic
patterns even after adjusting for patterns in the means and variances of the underlying assets. This is consistent with the
hypothesis that informed trading in options can make the order flow in the options market informative about the value of the
underlying asset, making options nonredundant. The intraday patterns in adjusted option return variances are further consistent
with a model of strategic trading by informed and discretionary liquidity traders.